Friday, August 26, 2016

Mr Opalo is on the right path

The Banking (Amendment) Act, 2016, is now law and the Banking Act is now amended to ostensibly protect depositors and borrowers from banking institutions' rapaciousness when it comes to the niggly problem of interest rates paid for deposits and those charged for loans. By law, now, if a banking institution takes your money in deposits, the minimum it can pay in interest on the deposits is 70% of the Central Bank rate and if it advances a loan, the maximum it can charge as interest is 4% above the Central Bank rate (though various respected pundits have pointed out that the surprisingly vague language of the amendments leaves much to be clarified by way of regulations). Whether this will reduce the overall cost of credit in the market or boost savings rates among depositors is contested ground.

A respected analyst points out that there are many variables that affect the cost of credit, among these are a robust statutory environment and an efficient judicial system. In order for banking institutions to advance credit, this is what he suggests parliamentarians have neglected in their zeal for populist laws such as the Banking (Amendment) Act, 2016:

Second, Kenya needs a
21st century commercial legal system, fully fitted with bankruptcy laws
that give risk takers a second chance. Streamlining commercial laws will
bring certainty to the debt recovery process when debtors default. It
will also ease the bankruptcy process and give risk-taking entrepreneurs
second chances. Again, thinking critically about how to reform the
practice of commercial law in Kenya – through legislation and further
reforms in the Judiciary – requires more work than waheshimiwa are
willing to put in.
Read more at: http://www.standardmedia.co.ke/article/2000210233/new-bill-seeking-to-fix-borrowing-rates-in-kenya-misguided

Second, Kenya needs a 21st century commercial
legal system, fully fitted with bankruptcy laws that give risk takers a second
chance. Streamlining commercial laws will bring certainty to the debt recovery
process when debtors default. It will also ease the bankruptcy process and give
risk-taking entrepreneurs second chances. Again, thinking critically about how
to reform the practice of commercial law in Kenya – through legislation and
further reforms in the Judiciary – requires more work than waheshimiwa are
willing to put in. http://www.standardmedia.co.ke/article/2000210233/new-bill-seeking-to-fix-borrowing-rates-in-kenya-misguided

Banking institutions in ideal markets go out of their way to ensure that their risks are properly hedged. This could take the form of interests that they either pay for deposits (keeping them as low as they can get away with in a competitive market) or they charge in respect of loans they advance (charging the highest rates that they could without jeopardising the likelihood of repayment). But interest rates can also be affected by the quality of the judiciary and the commercial laws of a country. In light of the enactment of the Companies Act, Insolvency Act and Limited Liability Act in 2016, and the existence of the Banking Act, the Sacco Societies Act, the Capital Markets Act and the Central Bank of Kenya Act, among several others, the commercial laws of Kenya are not the problem any more. The judiciary still has a long way to go, though.

It isn't enough to hire more judges and magistrates when the integrity, speed and legitimacy of the judiciary remains in doubt. When it comes to things like bankruptcy or insolvency, debt-collection and contract disputes, a corrupt, slow, inept and illegitimate judiciary is as much a hindrance to credit-creation as high interest rates on loans. So too are an ineffective public prosecutor's office and police investigation forces; if the DPP is incapable of swiftly and surely prosecuting bank fraudsters, conmen and other finance-sector criminals and if the police don't have the technical expertise to investigate these kinds of crimes, fewer and fewer (imprudently managed) banks would be willing to advance loans in these kinds of markets.

In Kenya the problem has never been the law but its proper and fair enforcement. Regulators, public prosecutors, police and the judiciary have been accused of picking and choosing which of our laws to enforce robustly and, more importantly, against whom to enforce these laws. It isn't enough to declare the constitutional principal of equality before the law, but these institutions must actually live by that principal. But when all of them pick and choose which financial crooks to prosecute or which tone a financial crimes prosecution will take, they undermine peoples' and investors' faith in the justice system and how much money they are willing to commit in such an economic system. President Kenyatta may have done the right thing by assenting to the Banking (Amendment) Bill, 2016. But he needs to do more to ensure that the entire financial system, in the end, never needs statutory bullying to offer truly competitive interest rates.